ERP on hand inventory (book) can vary from actual inventory for many reasons: damaged inventory no longer usable, physical disappearance, paper disappearance, located in different warehouse/bin, etc. Regardless of the reason for the variance, these differences can have negative impact on the business. Examples include planning based on invalid data, lost sales and bad inventory turns.
Inventory counts can take place in two basic ways, full or cycle count. Full counts involve counting all items in the warehouse. Generally this can be disruptive as it is generally done when operations have ceased. Ceasing operations reduces count errors due to items being moved or used. It has the disadvantage of the soft and hard costs of shutting down. Some businesses find it necessary to do annual stock take to satisfy audit requirements.
Cycle counts is an alternative to doing a full count. The concepts is that if you count and correct smaller sets of inventory, you can increase your inventory accuracy with minimal disruption to operations. Doing cycle counts also gets book inventory corrected on a more timely basis. Cycle counts can be as simple as counting some aisles and bins on a regular basis and recording corrections. This can be effective for some businesses, but still may have an impact on operations unless counts happen after regular hours. But this approach may spend much time counting inventory that is not as important to the business as other items. It would be better to count items that are more important to the business more often. There are several techniques for determining “important” items. What is important to your business may be different that another company’s idea of importance. Things to look at may be: item inventory turns, gross margin, GMROI, value, exposure to on hand variance, etc. In most cases you will want to classify items as ABC where items that need to be counted more often being A, etc. You can then count a mix of A, B and C items on a regular schedule. It may also be a good idea to track when last counted, so you don’t count recently counted items more often that other items of same classification.
In any case you will want an easy way to record counts, investigate variances (if appropriate), recount and eventually post the variances. Your ERP system is only as helpful as the data accuracy.